“One might expect that a book titled How Adam Smith Can Change Your Life would provide helpful hints for achieving economic success. In particular, if one had just a passing acquaintance with Smith’s concept of the invisible hand, one would expect that Smith would absolve us from all feelings of obligation to others. After all, he famously says in The Wealth of Nations that “Every individual intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his original intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it.”

In other words, “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest.” Outside the family, on the larger economic scale, things work out well when we pursue self-interest. Bill Gates and Steve Jobs have improved the lives of millions of people they never met by pursuing self-interest. So we might expect How Adam Smith Can Change Your Life to tell us how we can do likewise."

Comment

William Irwin, presumably a professor imbued with a moral obligation to treat others in the Academy with respect for their written views, he is rather casual in his use of them. He quotes Smith’s actual words but tears them out of context, though probably innocently, he uses quotations he has read written by third-party modern economists. Smith never lost sight of the candid qualifications in his Works. In the first quotation William Irwin implies that Smith’s “every individual” intends “only his own gain” in all things, when Smith actually refers to an individual who acts to protect his capital rather than take the risks he perceives from sending it abroad. This circumstance leads him to invest his capital locally. He is ‘risk averse’ as we would say today. From this perfectly understandable private motive, this individual acts to protect his capital, with the intention of avoiding the risks of personal loss. Smith uses the metaphor of “an invisible hand” to describe his actions in “a more striking and interesting manner” - as Smith described in his lesser known, but widely applied in his Works, from his “Lectures on Rhetoric and Belles Lettres” (1762-3) 1983, p. 29, Oxford University Press.

One thing is also clear. The paragraph quoted goes on to make a general statement of Smith’s thinking on the consequence of actions that follow from people’s motives for initiating them. Their initial actions are ‘intended’, as are the ‘consequences’ of those actions. Smith used the ‘invisible hand’ to describe the effect of the motives for the agent’s actions. That is the limit of his use of the metaphor, and the intended outcome was the limit of intentions, because those intended actions also could have unintended consequences. This is where the sequence became muddled among modern economists (who do not always understand the use of metaphors) and readers who simply follow what professional economists assert publicly and unthinkingly imply that the metaphor of the invisible-hand actively intends the unintended consequences! If that was true of Smith’s use of the metaphor, it leaves unexplained how the ‘invisible-hand” metaphor knows about the unintended consequences.

Some theologically inclined economists and philosophers have a ready ‘explanation’ of sorts by asserting that the “invisisble hand” is the “hand of God”, which immediately raises difficult questions about its scientific basis and requires major shifts in human beliefs systems.

Moreover, William Irwin adds to his too slick misunderstanding of Smith’s argument by quoting another brief sentence from what was a fairly long argument; specifically: “it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self-interest” (WN I.ii. 2: 26-27).

I ask William, whose self-interest was Smith referring to? Not just the person “expecting her dinner” (the buyer) but from the potential sellers too, and his advice was directed at the buyer. Now, both individuals had a personal interest in the potential transaction and Smith’s advice to potential bargainers in such transactions (explained in the paragraph, not quoted by William) was to persuade them both that that they could not expect such a transactions from their “benevolence only”. They had to do more if they were “to prevail” and they could achieve this by showing them (the “other party”) that it was in their (“other party’s”) self-interest to transact with the customer on the terms she offers for the “butcher’s, brewer’s and baker’s (the sellers’ products).

Smith sums up thus: “Whoever offers to another a bargain of any kind proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it ias in this manner that we obtain from one another the far greater part of the good offices which we stand in need of” (WN I.ii.2: p. 20).

I have taken much space to clarify Adam Smith’s meaning of self-interest that is lost in William’s misunderstanding of Smith’s (moral) political economy. It is not about rampant selfish self-interest contrasted with moral relationships. By using persuasion, adequately covered in Moral Sentiments, people mediate their self interest through compromise, persuasion, exchange and “good offices” towards each other.

There is no contradiction in Adam Smith’s two books; there is no Das Adam Smith Problem. Those philosophers who believe there is a problem, do not know Adam Smith’s Works and rely on clipped paragraphs and second-hand, often ideological, interpretations that do not stand up to scrutiny.

2 Comments:

I know that you have mentioned that it was John Stuart Mill was the first one to associate Adam Smith with laiseez faire.On this subject I have some development.I do not know if you have read the works of Thomas Hodgskin,a 19th century British journalist and political activist. In his book 'Popular Political Economy'he mentions how Smith shows futility of all laws and social regulations and therefore for prosperity we must repeal all of them and unrestricted flow of free market must be allowed.Smith is associated with Natural liberty("laiseez faire")in all but name.Note that the book was written in 1827,only 37 years after Smith's death.Online library of Liberty has his works for free if you wish to read them.

On a side note I have started reading Wealth of Nations("at last")and would be posting thoughts on it soon.I just wish to ask would I be able to follow the whole book as I am pursuing Computer engineering and don't know much about economics?.

ShashankThank you for the reference to Thomas Hodgskin.I do not agree with him if he conflated Natural Liberty with laissez faire nor did he suggest that "all laws and social regulations were futile". He specifically identified laws for 'party walls in buildings as needed to prevent fires invading neighbouring properties and also limitations on bank interest and small denominated currency credit that encouraged people to make risky financial decisions.Wealth of Nations is a long book and often wanders a bit. It quires patience when reading it.Ask me any questions you might have on obscure passages.Gavin